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Bull vs bear – lifecycles of the stock market

We look at what bull markets and bear markets are, what they mean for investors and how to invest in them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

There are all sorts of metaphorical animal terms that pop up in the world of investing, but two of the most common are bull and bear markets.

Just like in nature, stock markets have lifecycles too. The bull indicates when the stock market is climbing, and the bear indicates when the market is falling.

It’s thought the terms were coined back in the 17th century when The London Stock Exchange was set up – a period when bear baiting was popular. When pitted against a bull, the bear would swat down with its paws, while the bull would raise its horns upwards in defence.

Although this was centuries ago, the terms are still relevant today. But they’re completely different when it comes to the impact they can have on your portfolio.

This article isn’t personal advice. Remember, investments can go up and down in value, so you could get back less than you originally invested. If you’re not sure what to do, ask for financial advice.

What’s a bear market?

As investors, we know stock prices can rise and fall. But what about when prices fall, and fall some more?

In the world of investing, this is what’s known as a bear market.

A bear market is when stock prices or the stock market as a whole falls by 20% or more, or falls for more than two months.

As the world was thrown into lockdowns last year, global markets saw one of the fastest plunges into a bear market. But also one of the fastest bounce backs into a bull market.

Bear markets usually happen when an economy slows down or if unemployment rates rise. Times like these can make investors panic. With a more uncertain outlook, investors might start to sell off their investments to try and protect their hard-earned cash.

It’s a bit of a catch 22 situation though. As more people pile out of their investments, it can cause prices to fall even lower. As prices carry on falling, other investors might also get spooked and sell too, creating a dangerous downward spiral.

Even though bear markets haven’t been as common since the Second World War, it’s estimated investors will live through around 14 bear markets in their lifetime. So it’s important to know how to navigate them, but we’ll come onto that later.

What’s a bull market?

With bull markets being the opposite of a bear market, they come around when stock prices or markets rise by 20% or more – usually after a recent drop.

Anything that’s traded on a live stock market – like shares, bonds, commodities and currencies – can be described as a bull market when their prices are rising.

A bull market is normally a sign that the economy is in a strong position with low unemployment rates. A healthy economy with lots of people working tends to be good for stock prices, which builds investors’ confidence in the market.

Despite the sudden dip at the start of the pandemic, overall the US has been in a bull market for over 12 years. It’s situations like these that build investor confidence. But this is when investors should be extra careful. No one can predict how long a current bull market might last, and you don’t know when it’s reached its peak.

What can we learn from history?

Historically, bear markets have been shorter than bull markets. One example that lots of us will be familiar with is the 2008 financial crisis.

UK stock market – 2008 financial crisis

Scroll across to see the full chart.

Past performance isn’t a guide to future returns. Source: Thomson Reuters, 01/01/2008 to 01/01/2018.

Fundamentally the 2008 financial crisis was a crisis in confidence, affecting markets across the globe. Concerns that started in the US mortgage market spread to the entire financial system. Fears mounted and lending dried up. Unfortunately for some, borrowing was essential, and defaults followed.

The collapse of Lehman Brothers, a large Wall Street investment bank, on 15 September 2008 became the iconic moment of the crisis. The initial market reaction wasn’t huge. But as the scale of the problem was recognised, lots more banks looked like they could face the same fate. The market dropped further – by March 2009 it was nearly half of its pre-crisis value.

Although this was a big drop into a bear market, you can see from the graph above there was steady recovery into a bull market.

Some of the best days we’ve had in the stock market have closely followed some of the worst. We think it’s about time in the market, rather than trying to time the ups and downs.

What should investors do?

We should all have some sort of investment strategy in place to help deal with the bull market ups and bear market downs.

The best approach is to have a diversified portfolio.

Diversification helps smooth out the ups and downs your portfolio will go through. Holding too few, or too similar, investments can make those ups and downs a little more extreme.

Spreading your money between different types of investment helps reduce the risks of investing. Whether it’s types of companies, types of investments – like shares or bonds – different parts of the world, or investment styles. There are lots of ways you can do it.

Diversification – the investor’s tool we all need to talk about

Don’t forget about the long game

We’re emotional beings by nature, and investing can be a rollercoaster of emotions at times.

The way our emotions change during the highs and the lows is why lots of us decide to invest when markets are doing well and sell when markets are falling. This goes against good investment practices like thinking long term.

As we’ve seen, markets are cyclical. The key point to all of this is tough times don’t last forever, and markets have eventually recovered.

While it might be tempting to sell off your investments to avoid losing more money in a bear market, it means you’ve locked in your losses. A lot of the time if you’d held on a little longer, you could’ve made up for those once the bear market had recovered although there are no guarantees.

You should have the same mindset and approach to investing if the market is rising, or if the market is falling in the short term. Keep your nerve and be patient – that’s your best chance of getting rewarded in the long term.

What is a ‘60/40’ balanced portfolio and should investors consider it for the future?

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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